If Congress agrees to expand the North American Free Trade Agreement to Chile this year, one of the biggest controversies could be over an obscure process used to settle trade disputes.

Senate Majority Leader Bob Dole and eight of his colleagues sent a letter to President Clinton this week demanding that the Nafta dispute process not be extended to Chile.The step was spearheaded by Sen. Charles Grassley, R-Iowa, chairman of the trade subcommittee of the Senate Finance Committee, and Sen. Max Baucus, D- Mont., the former subcommittee chairman.

Their complaint is over "Chapter 19" named for the section of the Nafta in which it is described. It is intended to serve as an appeals process for two kinds of trade disputes - "dumping" and subsidizing of exports.

The theory behind dumping is that importers will sell goods at artificially low prices in order to capture market share and cripple their competitors. Whether or not this happens in practice, U.S. law provides for penalty duties on imports intended to offset this "unfair" discount. The same goes for imports found to have benefited from government subsidies, provided that U.S. companies are found to have been hurt by the pricing of imports.

When the United States negotiated a free trade pact with Canada in the late 1980s, Canada insisted on a new arbitration process to appeal U.S. dumping and subsidy rulings.

Canada, already the United States' No. 1 trading partner, had become the target of more and more U.S. trade actions. As other tariffs and trade

barriers were to be phased out under the free-trade pact, Canada was worried that U.S. authorities would abuse dumping and subsidy procedures to keep out imports from Canada.

Under Chapter 19, a subsidy or dumping ruling can be appealed to a panel of five independent trade experts drawn from the two countries involved. The panel is supposed to decide whether the authorities followed their own rules in ruling whether dumping or illegal subsidizing was taking place. It has the power to send decisions back for further review, or to overturn them.

This process - extended to Mexico in 1993 - has been used by all three Nafta countries, but its use in a handful of high-profile subsidy cases against Canada has earned it some powerful enemies in the United States.

In a number of cases filed against Canadian pork imports, and one case filed against softwood lumber imports, Chapter 19 eventually overturned U.S. rulings that had resulted in duties on Canadian imports.

Those duties raised costs for Canadian pork and lumber producers and increased the profits of their U.S. competitors. Chapter 19 panels repeatedly questioned the logic and the intention of U.S. authorities in finding that illegal subsidies had hurt U.S. companies.

Lawyers for U.S. lumber and pork producers alleged that the panelists in these cases went too far in second-guessing U.S. officials, well beyond the level of deference that they believe would have been granted by a U.S. appeals court.

That is the basis for the complaint by the nine senators this week. Instead of using the Chapter 19 process, they say Nafta countries should go to the new World Trade Organization to appeal dumping and subsidy rulings.

Canadian officials say that the WTO rules are not strong enough to protect exporters from unfair decisions in the United States, Mexico, or Chile. Under Chapter 19, hundreds of millions of dollars in penalty duties collected on Canadian lumber were returned to Canadian companies, with interest. Even if Canada won a WTO appeal, this relief would not have been mandatory.

Like Canada, Mexico insisted on Chapter 19 to protect the interests of its exporters, and many U.S. exporters supported it in the Mexico free trade talks

because of fears that Mexican courts would yield unfair decisions.

The Clinton administration supports Chapter 19 for the current Chile talks, and Chilean officials say they would not accept a free trade agreement without it. Although opposition to Chapter 19 is not as strong in the House, lawyers for lumber and pork producers believe they can stop its extension to Chile and begin making the case for revoking it for all of the Nafta.

Canadian officials have long claimed the government would renounce the entire free trade pact if that ever occurred, but that would be drastic step that could badly damage the Canadian economy, which is hightly dependent on trade with the United States.